Rationale

 The assigned rating factors in the expected improvement in the operating income and earnings of Shalby Limited (Shalby or the company) over the medium term, driven by higher revenue from non-arthroplasty—critical care and general medicine, which is also reflected by strong revenue growth of ~400% % in Q1 FY2022 on Y-O-Y basis and ~33% sequentially. The revenue at the consolidated level is also expected to get a boost by business acquisition of implant and joint manufacturing under its step-down subsidiary, Shalby Advance Technologies, USA (SAT), in Q1FY2022. The same is expected to provide diversification to the revenue stream as well as better control over its cost structure in the long run from in-house manufacturing of implants. The hospital's earnings profile is strong, supported by improving the scale of operations, and better cost management. The rating continues to factor in the extensive experience of Shalby Limited's (Shalby's) founder-promoter, Dr. Vikram Shah, who along with the management team, has a demonstrated track record of more than two decades in the healthcare industry. The rating also derives comfort from the strong brand equity of Shalby in Gujarat and Madhya Pradesh, with a growing presence in Rajasthan, Maharashtra and Punjab. Further, the rating is supported by Shalby's leadership position in arthroplasty speciality segment as well as its diversification into cardiology, oncology, bariatrics and other non-arthroplasty segments. ICRA also continues to take comfort from Shalby's healthy financial risk profile, characterised by improvement in profitability, comfortable capital structure and healthy coverage indicators and positive long-term demand outlook for healthcare services in India on the back of better affordability by virtue of increasing per capita income, widening medical insurance coverage and under-penetration of healthcare services. The rating, however, remains constrained by the growing, though moderate occupancy levels (~36% in FY2021) of Shalby's hospitals, which puts pressure on the overall operational performance of the company. The rating is constrained by the low return on capital employed (RoCE) levels (at 6.9% in FY2021) and is only likely to improve gradually over the next few years, post successful ramp-up of the overall occupancy level, risks of competition and attrition of doctors. Nevertheless, the risk is partly mitigated by Shalby's strong brand pull and long-term contracts with doctors. Further, the rating also considers the high reliance on its flagship hospital, SG Highway, for revenue and operating profitability, although the contribution of other hospitals has been increasing gradually. The company's expansion strategy has been aggressive, with six new hospitals becoming operational since FY2015 and two hospitals are under construction. ICRA also notes that Shalby, through its stepdown subsidiary, SAT, backward integrated into implants and joint manufacturing business by acquiring assets of Consensus Orthopedics, the USA in Q1FY2022. Though the same is expected to provide diversification to revenues and supplement its in house sourcing of implants in the long run, given that the acquisition was largely debt funded and its operations are yet to break even, Shalby's ability to meaningfully turn around and profitably scale up the new business, remains critical credit monitorable.